Why it's time to buy when your mother says sell

|14th February 2015|

I had a very unusual but interesting chat with my mother this week

regarding the ‘Greek crisis’ and the outlook for the Euro. Now to be clear my mother is not a trader, in fact she has no interest in financial markets what so ever which is why I would rarely discuss what it is I do with her. This made it even more surprising that she brought up the subject.

It was the opening line of the discussion that got me afterwards, which was ‘Are you selling the Euro’. She continued to state that Greece would exit the euro zone and that the Euro would collapse, so I better sell. My response was to stop watching the news and that I would be better advised to buy the Euro than sell it, which of course made no sense to my mother.

I am very familiar with ‘herd mentality’ and regularly trade again the main stream herd, in fact it’s one of my main uses of Commitments of Traders data. I still however have never seen herd mentality reach the level where my mother is giving me investment advice and I’ve been looking for areas to buy the Euro ever since.

To be honest, I don’t think the Euro’s decline is done just yet, but I do believe the end is closer than most would have you believe. Let’s take a look at the commitments of trader’s data I referred to and I’ll show you why. The ‘herd’ in the professional trading world is represented by the large speculators (Institutional traders who seek to profit from the market). These traders trade in the direction of the trend, which perfect sense of course. Until that is we get to the point where everyone has jumped on to the trend, and in the case of the Euro, there is no one left to keep selling.

The image on the right shows the number of futures contracts currently held by large speculators. The red line is the interesting one as it shows the number of contracts being sold. You can see that we are now very close to the highest ever number of contracts being sold, which was just over 251000 contracts represented by the green line. To make my point we only have to look at what happened when that high was set in June 2012. If you scan back through your charts you will see that the Euro bottomed a few weeks later and then rallied from 1.2000 to 1.4000.

Logic on its own would dictate that no market will continually move in one direction and if we consider the current decline in the Euro began last May, we are most certainly closer to the end of this trend than the beginning. The information found in this image and of course the conversation with my mother just confirms the fact that this trend is almost done.

In trading we must remain focused on doing the same thing week in week out. Its easy to be sidetracked by mass hysteria or 'the herd' so you must remain disciplined enough to realise when you are being pull towards the herd and just follow your normal routine.